USA S-Corp 100% Shareholder Basis Calculation

[EVAC]

In 1998 my wife became the 100% shareholder of a family S-Corporation. The business is very small and offers services in a retail shop. It is run pretty much like a sole proprietorship but all accounting is kept separate from personal. We have never had any years end with losses. My question centers around the basis calculation. If she is the only shareholder with very simple business practices (daily income and basic purchases, no loans or large purchases/transactions) and no losses reported, are the retained earnings essentially the same as her basis calculations?

 

[Werner Reisacher]

Her shareholder's basis in the S-Corp is the summary of the original paid-in capital plus retained earnings from prior years and the profit of the current year.

 

[EVAC]

Thanks for the reply. Because she is the only shareholder and we have such a simple business operation, it seems that the accumulated adjustment account calculation with each 1120-S mirrors her basis. Everything in that calculation seems to be the only things affecting her basis. Again we never have debt, loans or odd transactions. In 2019 the only things affecting the AAA were ordinary income, disposal of section 179 property, her distributions and charitable contributions. Even the section 179 items were very unusual. Normally it's the same thing year after year: ordinary income, distributions and charitable contributions. We don't change much. As for the original paid-in capital, the shares of the S-corp were gifted by other family members. Since then it's been money in and money out like a very simple business. I am playing catch up on the emphasis that the IRS is putting on the basis calculations. I have heard of the expression "stock basis schedule". Is there such a thing? If so what does it look like? Thanks again.

 

[Werner Reisacher]

From a legal point of view, an S-Corporation is a stand-alone legal entity and protects its shareholder's personal assets. Their financial risk is limited to their investments in the company. From a tax point of view, S-Corporations are "pass-though" entities. They are generating taxable income but do not pay taxes on a corporate level. At the end of the fiscal year, they send each shareholder IRS Form K-1 which passes the tax liability on to each shareholder in proportion to the total funds they invested in the company. (called "shareholders stock basis)
There are three reasons why it is done this way. The IRS wants to prevent that shareholders are deciding to distribute all profits to the member who pays the lowest tax rate and re-distribute the funds amongst each other.
Unless the level of each shareholder's stock and loan basis is up-to-date, reconciled, and signed off regularly, some shareholders could be tempted to "dip into the honey pot" and withdraw funds from the corporation that actually does not belong to them. Both, a trust and a tax issue.
The other is related to the definition of the shareholder's liability and capital at risk in case of litigations.

 

[Werner Reisacher]

And sorry, forgot about the "stock basis schedule" thing. As mentioned, the transactions that make up the balance of the stock basis should be listed on a written document and acknowledged and approved by the shareholders with their signatures. Not an "official" document. Just one of the usual accounting documents that support transactions at a later date if needed.